3 Types & Impact of Free Trade Agreements

3 Types & Impact of Free Trade Agreements: When two or more countries settle on the terms and items of trade, the legal process and paperwork are known as ‘trade agreement.’ It defines all the taxes and tariffs, import and export duties imposed whereas successful execution gives way to international trade.

That said,
‘imports’ refer to goods and services produced and shipped from a foreign
country and bought by the domestic market. It can include anything being
shipped into the country even if it’s a foreign subsidiary of a domestic firm.
In case the consumer is within a country’s border whereas the importer or the
provider is across, the good or service is an import.

On the contrary, exports are goods and services made within a country and sold across that can be anything shipped from a national organization to the foreign affiliate, a franchise or branch. The coming of digital technology into the trade sector made the process more streamlined, quick and efficient which termed as ‘smart trade’.

3 Types & Impact of Free Trade Agreements

Types of
Trade Agreements

There’re three
different types of trade agreements that are defined below;

Unilateral

When a country
imposes certain trade restrictions, and no other state intervenes in between,
it’s known as ‘unilateral trade agreement.’ But then a country can also go easy
on trade restrictions one-sidedly. However, it rarely happens. Such an
agreement or situation puts a country at a competitive disadvantage, but
advanced and developed countries execute the practice as a type of foreign aid
to help emerging markets strengthen their strategic industries that are too
small.

Bilateral

As the term
implies, ‘bilateral trade agreement’ happens between two countries when they
ease trade restrictions as a means to expand corporate opportunities. The
tariffs are thus lowered to prefer smooth trade between both nations whereas it
all leads to one thing, protection and subsidizing domestic industries.

For countries
that are in automotive, oil and food production industries, bilateral trade
agreements take place between them. Example of the world’s most significant
bilateral trade agreements in Obama’s rule was the Transatlantic Trade and
Investment Partnership with the EU.

Multilateral

Perhaps the most
difficult to negotiate are multilateral trade agreements that take place
between three or more countries. The higher the number of participants,
difficult the negotiations due to differences because each state has its
particular needs and unique requests.

But on successful
negotiation and agreement, these can be extremely powerful since they cover a
large geographic area, more significant competitive advantage and cater to the
nation’s prosperity on a much bigger level. The terms and conditions on which
multilateral agreement takes place are equal for all participant countries thus
reducing conflict and other such hindrances.

Trade
Agreement Effects

Removing tariffs
lower the import costs which favor consumers however leaving domestic
industries to suffer as they’re incompetent to the international standards in
terms of quality and lifestyle. As a result, the trades are likely to go out of
business which leaves the employees to suffer.

Apart from all
these are facts, trade agreements also have the most excellent benefits for the
domestic industries as joint ventures also introduce new employment
opportunities which even better up the skill set of existing employees.

The Role
of World Trade Organisation (WTO)

Once the
agreement thrives and goes above the regional level, they need to manage, and
this is where the World Trade Organisation steps in. For those who’re
unfamiliar with the WTO, it’s a foreign organisation that helps to improve the
global trade agreements and responds to complaints.

Key
Difference from Domestic Trade

Another
difference is the production such as labor and capital that are typically more
mobile within a nation than across the border.
It is one reason for certain restrictions in
goods and services being imported from another country. Trading in certain
products and services can empower a country’s economy whereby establish good
relations between the participating nations especially if it’s ‘smart trade’
due to extreme convenience.